Options Trading for the Institutional Investor: Managing Risk in Financial Institutions

The Definitive Options Guide for Institutional Investors

• 100% focused on the challenges, limits, and risks faced by institutional investors.

• Presents innovative strategies, advanced risk evaluation techniques, and Thomsett’s powerful new chart-based trade selection method.

Portfolio managers must make decisions that are conservative enough to minimize losses and fit institutional constraints—but they are also expected to match or beat inflation and taxes. Michael C. Thomsett shows how to use options to meet both challenges, augmenting net profits while also safeguarding equity.

You’ll learn how to integrate fundamental and technical analysis to widen your perspective on value and risk; protect paper profits while improving agility in shifting markets; prudently apply alternatives to stock purchase; and create advanced LEAPS strategies that still fit conservative profiles. Each technique is demonstrated using a consistent, easy-to-understand model portfolio. 

To protect portfolios in volatile and uncertain markets, institutional investors must hedge losses, create new income sources, and reduce risk. Now, in this extensively updated and expanded guide, renowned options expert Michael C. Thomsett helps you achieve all these goals simultaneously.

Thomsett shows how to systematically exploit powerful, carefully chosen options strategies to dramatically increase overall returns while managing risks within your institution’s limits. He discusses covered call writing on carefully selected stocks, contingent purchase strategies, and powerful “combination” strategies that produce cash to bolster current income.

This edition adds important coverage of risk evaluation, plus a new chart-based analytical method relying on reversal signals as an alternative to volatility analysis. Thomsett also introduces two powerful new strategies for optimizing returns and controlling risk: the 1-2-3 Iron Butterfly and Dividend Collar.

• Contingent strategies: safer ways to enter the market

  Earning profits without owning stock

• Options strategies for down markets: thinking outside the “market box”

  Safer, capital-preserving use of short puts, calls, and rescue strategies

• The dividend collar: how to eliminate virtually all market risk

  The three part hedge: hedging stock risk, hedging the put, and hedging the short call

• Generating cash with covered calls: a conservative approach

  Exploiting the time value premium, without taxation pitfalls

To protect portfolios in today's volatile and uncertain market environment, institutional investors need to hedge losses, create extra sources of income, and reduce risk. In his extensively updated and expanded Options Trading for the Institutional Investor, Third Edition, renowned options expert Michael C. Thomsett shows how to do all this effectively.

One step at a time, Thomsett helps institutional investors exploit powerful, carefully chosen options strategies that can dramatically increase overall returns as you manage risks within your institution's limits. Thomsett discusses covered call writing on carefully selected stocks, contingent purchase strategies, and powerful "combination" strategies that produce cash to bolster current income. He guides professional investors through every strategy, using actual examples, portfolios, and graphs taken directly from today's markets. Wherever applicable, he addresses specific forms of risk and volatility that only institutional investors face.

 This thoroughly updated Third Edition includes a chart-based analytical method that relies on reversal signals in the underlying as an alternative to volatility analysis. Thomsett presents new chapters on two powerful strategies he has developed and utilized to optimize returns while minimizing risk: the 1-2-3 Iron Butterfly, and the Dividend Collar. This edition also adds detailed new coverage of risk evaluation.

Michael C. Thomsett has published more than 80 books on investing and business topics, including several other FT/Prentice Hall projects (The Options Stock Profits: Getting to the Core, Put Option Strategies, The Options Trading Body of Knowledge, and Trading with Candlesticks),and many other books concerning options and stock market investing. His best-selling book Getting Started in Options is in its ninth edition and has sold more than 300,000 copies. Thomsett is also the cofounder of the education sites ThomsettOptions.com and ThomsettStocks.com. He lives in Nashville, Tennessee.

Preface       xi

Chapter 1 Setting the Ground Rules      1

Chapter 2 Option Basics      15

Chapter 3 Options in Context      61

Chapter 4 Chart-Based Analysis      97

Chapter 5 Managing Profits and Losses       121

Chapter 6 Options as Cash Generators      143

Chapter 7 The 1-2-3 Iron Butterfly       169

Chapter 8 The Dividend Collar       179

Chapter 9 Alternatives to Stock Purchase       193

Chapter 10 Option Strategies in Down Markets       217

Chapter 11 Combination Conservative Techniques       251

Chapter 12 Risk Evaluation Techniques       281

Chapter 13 Stock Selection and the Option Contract       291

Glossary       309

Appendix: Option Trading Strategies       315

Index       319